Broadway Financial Corporation — Q3 2017 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 30, 2017; balance-sheet comparisons are against December 31, 2016. The company is a bank holding company whose principal subsidiary is Broadway Federal Bank.
Key financial metrics
Amounts are in millions of dollars except per-share data and ratios.
| Metric | Q3 2017 / Sep. 30, 2017 | Comparable period / Dec. 31, 2016 |
|---|---|---|
| Net interest income | $3.239; nine-month total $9.320 | Q3 2016 $3.026; nine-month 2016 $8.538 |
| Net income | $0.503; nine-month total $2.268 | Q3 2016 $0.327; nine-month 2016 $1.279 |
| Basic / diluted EPS | $0.02 / $0.02; nine-month $0.09 / $0.08 | Q3 2016 $0.01 / $0.01; nine-month $0.04 / $0.04 |
| Net interest margin | Q3 3.03%; nine-month 2.87% | Q3 2016 3.02%; nine-month 2016 2.93% |
| Total assets | $440.7 | $429.1 at Dec. 31, 2016 |
| Cash and cash equivalents | $68.3 | $18.4 at Dec. 31, 2016 |
| Loans held for investment, net | $320.5 | $379.5 at Dec. 31, 2016 |
| Loans held for sale | $22.5 | None at Dec. 31, 2016 |
| Deposits / FHLB advances | $294.9 / $86.0 | $287.4 / $85.0 at Dec. 31, 2016 |
| Stockholders’ equity | $48.1; book value $1.75 per share | $45.5; book value $1.66 per share at Dec. 31, 2016 |
Results, cash flow and material changes
- Q3 net income rose $176,000 year over year. Higher net interest income, a $300,000 loan-loss provision recapture and a $160,000 loan-sale gain contributed; higher operating expenses and $284,000 of income tax expense partly offset the gains.
- Nine-month net income increased $989,000. Net interest income rose $782,000, non-interest income rose about $1.1 million, and provision recaptures increased $400,000; higher taxes of about $1.2 million and slightly higher expenses partly offset these items.
- Nine-month operating cash flow was a $9.1 million outflow, primarily reflecting originations of multifamily loans held for sale. Investing activities provided $50.6 million and financing activities provided $8.5 million. Cash increased $49.9 million to $68.3 million, mainly following loan sales completed before quarter-end.
- The bank originated $94.7 million of loans for sale, sold $81.1 million of multifamily loans and recorded a $383,000 gain during the first nine months. Management said it intends to reinvest loan-sale cash in prime single-family loans and, to a lesser extent, investment securities and construction lending.
- Assets grew $11.6 million, while held-for-investment loans declined $58.9 million net, largely reflecting repayments and the strategy of originating multifamily loans for sale rather than retention, in part to address loan-concentration guidelines.
- Nine-month net interest margin fell to 2.87% from 2.93%, as lower loan yields outweighed growth in average earning assets. Q3 margin edged up to 3.03% from 3.02%.
Credit, liquidity, debt and outlook
- The allowance for loan losses was $4.2 million, or 1.30% of gross held-for-investment loans, versus $4.6 million, or 1.20%, at year-end. The nine-month $950,000 provision recapture reflected payoffs, recoveries and management’s assessment of improving portfolio quality; there were no loan charge-offs.
- Delinquent loans declined to $737,000 from $1.4 million; non-performing loans fell to $2.2 million from $2.9 million. Troubled debt restructurings totaled $9.4 million, including $1.8 million on non-accrual status. Management considers the allowance adequate but cautions actual losses may exceed estimates and regulators may require an increase.
- Liquidity included $68.3 million in cash and cash equivalents and $10.9 million in unpledged securities. The bank reported capacity to borrow an additional $29 million from the FHLB, subject to collateral and stock requirements, and an $11 million line of credit with another financial institution.
- FHLB advances were $86.0 million; junior subordinated debentures remained $5.1 million. The debentures bear interest at three-month LIBOR plus 2.54% (3.86% at September 30, 2017), with interest-only payments through March 2019 and principal amortization thereafter through March 2024.
- The bank exceeded regulatory capital requirements and was well capitalized. At September 30, its Tier 1 leverage ratio was 11.07%, CET1 and Tier 1 ratios were 18.15%, and total capital ratio was 19.41%.
- One customer relationship represented approximately 11% of deposits. Management expects to maintain the relationship. The filing provides no earnings guidance; results are not necessarily indicative of full-year results.
- The company expects the pending credit-loss standard (ASU 2016-13) may increase its allowance because it will require expected lifetime losses and consideration of forecast conditions; the amount was not yet determinable. Management did not expect material effects from adoption of several other accounting standards discussed.
Other notable items and risks
- Nine-month non-interest income included a $1.183 million insurance litigation settlement and $383,000 of loan-sale gains. The filing reports no legal proceedings in Part II; the settlement’s underlying details are not clear from the supplied filing text.
- Q3 expenses included $75,000 related to U.S. Treasury share sales and a $41,000 provision for unfunded commitments. Treasury sales over the prior ten months reduced its holding to below 10% of the company’s equity interests.
- A church loan was transferred to real estate owned during Q3; REO was $958,000 at quarter-end. The company reported no material changes to critical accounting policies and effective disclosure controls.
Important facts for investors to verify
- Whether loan-sale proceeds are redeployed as planned, and the resulting effect on loan balances, interest income and margins.
- The sustainability of earnings given the provision recaptures, loan-sale gains, litigation settlement and prior-year tax-valuation-allowance effects.
- Multifamily and church-loan credit performance, non-performing loans, TDRs, collateral values and allowance adequacy.
- Deposit concentration and funding mix. The MD&A’s CDARS One-Way Buy amount appears corrupted in the supplied text (“$43.331.1 million”); the filing text does not provide a clear value.
- Potential allowance and capital effects from adoption of the expected-credit-loss accounting standard.